The latest episode of DueDEX Connect focuses on Heikin Ashi candles, an instrument used to filter out the noise and visualize trends. We are thankful to have Crypto Commons with us to discuss this subject, especially since Heikin Ashi candles are an instrument that many traders underestimate.
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DueDEX: Hi Crypto Commons, thank you very much for being here today. Could you please provide a short introduction to Heikin Ashi candles for our audience?
Crypto Commons: Sure, thank you very much. Heikin Ashi candles were first developed in Japan. "Heikin" means average and "Ashi" means pace in Japanese, so Heikin Ashi means “average pace of prices”. They may look similar to regular candlestick charts, but the method of calculating them is different.
For trading purposes, it is important to understand that they tend to be more accurate in showing the direction of a trend.
Q: How do they differ from standard candlesticks?
A: On a regular candlestick chart each candle is independent and has no relationship with either the previous or the next one. But with Heikin Ashi charts, each candle is calculated and plotted using information from the previous one.
More specifically, the open price is the average of the open and close prices of the previous candlesticks. The close price in H.A. is the average of the open, close, high, and low prices of the previous candlestick. It works more like a moving average.
From a practical perspective, one could simplify and say that when a regular candle already signals a trend change - for example, the first regular green candle during a downtrend - the H.A. candle would usually still be red. It is only after confirmation - usually the second or third regular green candle during a downtrend on a normal chart - that H.A. turns green.
This means that H.A. cuts out plenty of choppy movements. That is also the reason why HA signals are a bit delayed compared to regular charts.
Q: This could be very useful for traders out there who might be afraid of entering orders in an unpredictable market. Given their unique characteristics, how do you spot a change of trend using Heikin Ashi charts? Is there a specific technique?
A: Well, using the Heikin Ashi you see the trend better by default: it shows you several green or red candles, instead of the choppy random colored candles you get in regular candlestick charts.
When the trend changes the H.A. candle will look like a regular DOJI candle. It has no or small body and long upper and lower shadows.
When market heads upwards there are strong green candles with upper shadows. When the market is trending downwards there are red candles with lower shadows.
Q: I see, you get extra clarity with Heikin Ashi candles. Here at DueDEX we were also wondering if you might provide an introduction to some basic patterns used with H.A.? Let’s say Doji, Triangles, etc.
A: Well, I think chart patterns are pretty much the same. However, it is worth mentioning that candle bodies and shadows may not be in the expected price place. This is due to the delay entailed by H.A.
Q: Sure, thank you very much. At DueDEX we were also wondering which indicators do you usually apply to Heikin Ashi charts? Is there any indicator you find more useful for HA than for normal candlesticks?
A: I use all traditional indicators on both, but some work differently on H.A. charts. For example, the RSI and the Stochastic RSI tend to be smoother in my opinion.
As you can see from the example below, on the H.A. chart, the RSI dives deeper. But the MACD is pretty much the same.
In general, I like to use the MACD, RSI and EMA RIBBON. And I prefer to use them on larger timeframes (1H - 4H - 1D - 1W). Sometimes my smaller time frame is 15min. On 5min and 1 min I do not find them to be effective.
Q: A bit of personal question here. When trading, do you prefer to use Heikin Ashi candlesticks or normal ones?
A: I use both, though I prefer looking for a trend using H.A. on larger time frames and then switching to regular charts to find entry and exit points on lower time frames. If I am placing low leverage long term trades I may also only use Heikin Ashi charts without resorting to regular candlesticks.
Q: Are there situations in which you would rather use one or the other?
A: As I was saying, for short term scalping - let us say 1min to 5min - I prefer regular candlesticks. While for long term trades and figuring out trends I stick to the H.A.
In the example below, on the daily time frame bitcoin is forming a red candle and the RSI is down. But using HA we are still green and RSI is up. The message I get from this is not to worry, there has not been a change of trend yet.
Q: I guess overall, you would probably agree with the common view that Heikin Ashi charts help filter noise out?
A: Exactly. HA allows you to read a trend more accurately because of their delayed signals and ability to exclude noise and choppy price movements. For instance, H.A. filters out false breakouts, something that can mislead a trader.
Thank you again Crypto Commons for having been with us tonight, and a special thanks to all those who have joined the conversation.